Bake-Off Inc Presentation

8/3/2019 Bake-Off Inc Presentation

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THE FUTURE OFSENSORTRONICS

By Bake-off Inc.


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Agenda

SensorTronics generals

Company overview

Market trends and implications

Risks & Strategy

Financial Analysis

Public Comparison Analysis (multiples)

Transaction Comparison Analysis (M&A)

DCF

Valuation Recommendation

Summary


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Agenda


Company overview


Risks & Strategy

Financial Analysis



DCF


Summary


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SensorTronics generalsCompany Overview

Sensor Electronics Technology Inc. aka SensorTronics is a market leaderin the supply of IT and Technical Engineering services to the DoD andIntelligence community

The primary target market / revenue source of SensorTronics is the US

Government SensorTronics management team plans to

Expand its geographical coverage and consequently its client base, starting withthe UK office that was recently opened.

Increase sales to existing clients through cross-selling opportunities between thecompanys 2 divisions IT Defense Communications Division and Defense

Systems Engineering Division

Leverage the economies of scale in the cost structure to increase operatingmargins


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Sensortronics

IT DefenseCommunication

Intelligence andCounter Int.

support

DefenseSystems

Engineering

IT Modernizationand Sustainment

CybersecuritySystems andInfrastructureDevelopment

Test andEvaluation

43% 57%

26% 10% 7% 33% 24%

SensorTronics challengesOrganizational revenues


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SensorTronics generalsMarket trends and implications

In the US, post 9/11 attacks, the annual defense budget more than doubledto $700b

Recent financial crisis placed great emphasis on US government toreducing spending, that includes defense industry budget

Cyber security, Intelligence Solutions, Specialized Services (predictiveanalytics, cloud computing, virtualization and identity management) arepotentially significant growth opportunities

Geopolitical turbulence in MENA region opens up a market for military ITand Technology services


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SensorTronics generalsSensorTronics Risks & Strategy

Main risk identified :

The primary target market / revenue source of SensorTronics is the US Government(94% of revenue, and unpredicted annual budget for spending risk*)

The future strategy of SensorTronics is based around : Need to access debt and capital markets for growth potential

Need to realize economies of scale through merging with / acquisition by acomplementary or supplementary service company (smaller budget, competitivemarket, reduce cost)

Diversify portfolio by offering a larger array of services to a wider customer base (riskreduction, revenue increase)

Value proposition market champion in cyber security and intelligence solutions,proven track record with DoD and Intelligence, ~ employees having USgovernment security clearances, international presence, high caliber managementteam


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Agenda


Company overview


Risks & Strategy

Financial Analysis



DCF


Summary


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CompanyStock Price($)

Market Cap($mln)

Firm Value($mln)

EPS ($)Firm Value /Sales

Firm Value /EBITDA

EBITDAMargin

P/E

ARS Inc. 64.57 1,446 1,899 4.44 0.7x 6.50x 7.7% 14.5x

CNI Inc. 75.45 1,788 2,211 3.74 0.9x 6.00x 8.7% 20.2x

KAIInternational

23.23 1,898 2,443 1.59 0.7x 7.00x 8.2% 14.6x

TridentScientific

12.19 2,502 2,955 1.29 1.1x 6.10x 9.4% 9.4x

All figures are from 2011.

SensorTr

onics

37.4

43.7

1,349

1,593

1,464

1,7083.43

6.0x

7.0x9.37%

The above 4 comps were chosen based on the following criteria:1. Annual revenue = $2.6 bln +/- 25%2. EBITDA Margin = 9.37% +/- 2.0%3. Functional similarities with SensorTronics

Firm Value / EBITDA range was selected 6.0x 7.0x as a result. Subsequently, firm value, market cap, and stockprice ranges were computed.Firm Value = (Firm Value / EBITDA) * EBITDAMarket Cap = Firm Value Debt ($200 mln) + Cash ($84.8 mln)Stock Price = Market Cap / No. of diluted shares (36,421,000)

Financial AnalysisPublic Comparison Analysis (multiples)


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Target AcquirerTransactionValue ($mln)

Firm Value/ Sales

Firm Value/ EBITDA

Sales($mln)

EBITDA($mln)

EBITDAMargin

Integral Systems Kratos 566 0.7x 7.2x 809 79 9.7%

LaBarge Inc. DucommunIncorporated

340 0.8x 7.5x 425 45 10.7%

Platinum Solutions SRA International 90 1.9x 18.2x 47 5 10.4%

Herley Industries Kratos 265 0.8x 8x 331 33 10.0%

Applied Systems CACI International 620 0.9x 8x 689 78 11.3%

SensorTronics TBD1,7081,952

0.66x0.75x

7.0x8.0x

2,604 244.0 9.37%

The above 5 comps were chosen based on the following criteria:1. EBITDA Margin = 9.37% +/- 2.0%2. Additional filtering of the comps was done based on transaction value.

Firm Value / EBITDA range was selected 7.0x 8.0x as a result. Subsequently, firm value, market cap, and stockprice ranges were computed.Firm Value = (Firm Value / EBITDA) * EBITDAMarket Cap = Firm Value Debt ($200 mln) + Cash ($84.8 mln)Stock Price = Market Cap / No. of diluted shares (36,421,000)

An offer price range for SensorTronics stock was calculated as 43.7

50.4, using the stock price calculation shownabove.

Financial AnalysisTransaction Comparison Analysis (M&A)


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Financial AnalysisDCF

DCF analysis was based on the forecasting of free cash-flows to the firm for a periodof 10 years, according to the following assumptions:

The cost of debt (Kd) was estimated using current capital market conditions for differentlevels of debt / capital and ratings. Our analysis indicated that, assuming a target 20% debt /total capital ratio, Kd=9.0% would be a reasonable approximation.

The firms cost of equity (Ke) was estimated based on the CAPM using E[Rm-Rf]=6.0% (riskpremium) and Rf=3.5% (UST10y).

The same process for comparables as in slide was followed in order to select levered

Betas which were delevered (using T=40%), averaged and re-levered using know

corporate finance relationships.

The companys levered Beta was estimated at 1.44 and its Ke=12.16%

Borderline IG Typical Speculative

Rating BBB BB

D/(D+E) 12.5% 22.5%

Spread over 10yTreasury

4.0% 6.0%


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Financial AnalysisDCF

Since we are proceeding with a FCFF we calculated the expected WACC with atarget D/(D+E)=20%. The result was WACC=10.81%.

Within the analysis both complete financial statements for the 10 year period and aterminal value assuming perpetual growth were projected. The indicative outcomeand sensitivity analysis follow.

The DCF implies a point estimate of $53.93 and a price range between $45.09 and

$57.65.

1% 2% 3%

10.0% $54.50 $57.65 $61.49

10.8% $51.00 $53.93 $57.50

12.0% $46.29 $48.92 $52.13

13.0% $42.68 $45.09 $48.03

14.0% $39.37 $41.57 $44.26

WACC

Perpetuity Growth

As of February 2011

ENTERPRISE VALUE 2,464,306.52

Debt 500,000.00 20%

Equity Value 1,964,306.52 80%

Shares 36,421.00

Target Price per share 53.93


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Agenda


Company overview


Risks & Strategy

Financial Analysis



DCF


Summary


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37.0

46.9

32.4

43.745.1

43.7

75.5

69.2

50.4

57.7

$20

$40

$60

$80

EV/ EBITDAcomparable

EV/ Salescomparable

P/E comparable Acquisitioncomparables

DCF

Equity

Value

pershare

Implied multiples:P/E 10.8 12.8 13.7 22.0 9.4 20.2 12.8 14.7 13.1 16.8Sales 0.7 1.1 0.6 0.7 0.5 1.0 0.66 0.75EBITDA 6.0 7.0 7.5 11.7 5.3 10.8 7.0 8.0

Public comparables

EV / Sales and P/E Comps were also computed in the same manner as the EV/EBITDA

comparable, but will not be used as basis for valuation as they exhibit high variances

ValuationSummary of methodologies


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Valuation

IPO

Based on the historical capital expenditure and the future expectation ofinvestments, we assume that $500 mln needs to be raised in the next yearfor SensorTronics.

Based on the public comparables analysis, we value the current share priceat $37 - $44

Target equity to Capital ratio = 0.8

(Current equity ($1,602 mln) + New Equity ) /

((Current equity ($1,602 mln) + New Equity) + (Debt ($200 mln) + New Debt) = 0.8

Knowing that New Debt + New Equity = $500 mln, we get New Equity =$239.6 mln, an amount that should be raised through an IPO

We suggest to double the number of current shares outstanding (36.4 mln),and issue new shares at a price of $22 each in the amount of 10.9 mln. Priceof $22 is suggested to be attract Institutional as well as retail investors.

So, the offer price for IPO = $22.

Total number of shares outstanding after IPO = 83.7 mln


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Valuation

Potential Acquirer

Potential acquirer of SensorTronics were selected after using the following filtersin the given order:

Break-even stock price based on 100% stock financing of the acquisition

The breakeven price was calculated as follows:

P / E (acquirer) = Break-even price / EPS (target)

If the break-even price was greater than $ 43 (i.e. minimum price obtained in acquisitioncomparables analysis), then the company was retained as a potential acquirer.

Size of the potential acquirer

If the size of the acquirer is much smaller than SensorTronics then the acquirer was filtered out.

Using a 70% stock financing and 30% debt financing, Pro-forma EPS

EPS of the combined company (after the acquisition) was calculated and this EPS should behigher than the pre-acquisition EPS of the acquirer, for the deal to be meaningful for the acquirer.There were no synergies assumed for this calculation.

Whether the functions of SensorTronics complement or supplement those of thecompany

Based on the company descriptions, it was analyzed how the acquisition might make sense forthe company.


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Valuation

Potential Acquirer

CompanyStockPrice ($)

EBITDA($mln)

No. ofshares(mln)

Newshares(mln)

New DebtIssued($mln)

After-taxinterest on newdebt ($mln)

EPSacquirer

Combined EPS

GD Corp 89.63 1,021 94.1 14.2 546 39.3 8.32 8.02

KAIInternation

al

23.23 254 81.7 54.9 546 31.3 1.59 1.64

KWY 27.21 168 23.7 46.8 546 39.3 0.27 1.31

Honeywellington

124.23 569 72.7 7.3 546 51.9 9.20 9.27

ViaSatellite

34.21 411 45.8 37.3 546 39.3 1.07 1.62

ViaSatellite seems to be the best potential acquirer based on the 4 filters discussedbefore., as it has the combined EPS much higher than the current EPS and the currentoperations of ViaSatellite would supplement those of SensorTronics.


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Agenda


Company overview


Risks & Strategy

Financial Analysis



DCF


Summary


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Recommendations

Our recommendation is to take the company public at a price of 22$ per share,and start a road show to gauge the interest of potential buyers. The roadshowshould emphasize on how the money raised will help SensorTronics strengthenits leadership position in the cybersecurity and intelligence services in the US -two areas where future growth opportunities are highly likely, while allowing the

company to have the means to expand its international reach.

Should the roadshow turn out unsuccessful, ViaSatellite has been identified asa potential acquirer for the activities of SensorTronics. The proforma EPS,shows an increase from the original EPS, making this transaction accretive for

ViaSatellite, while the potential offer price remains very attractive forSensorTronics. From an industry point of view, the deal would be seen as areinforcement of ViaSatellite and SensorTronics intelligence data gathering andnetwork security management offerings.


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Agenda


Company overview


Risks & Strategy

Financial Analysis



DCF


Summary


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Summary

Preferred option : IPO

Transaction: IPO of SensorTronics

Transaction Structure: Get 48% of the required capital by issuing equity and52% by issuing debt, to reach the target equity to capitalstructure of 80%.

New Equity value: $239.6 mln

Share price range: $19 - $22

No. of new shares @ $22: 10.9 mln

No. of total shares @ $22: 83.7 mln

Market capitalization: $1,842.1 mln

Purpose: Capital acquisition for investment and extension opportunities

Second scenario : Acquisition Analysis

Transaction: Sale of SensorTronics to ViaSatellite

Transaction Structure: 70% stock payment and 30% Cash raised by debt

New Debt Issued: $546 mln

Offer Price for SensorTronics: $50

New EPS value: $1.62

No. of new shares: 37.3 mln

Purpose: Higher value for shareholders and creation of stronger entity


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Appendixes



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SensorTronics challengesPublic Comparison Analysis (multiples)

Sensor Tronics Ars IncAVUInc

CNI IncLinerCorp

ESVCorp

GDCorp

Honeywellignton

KaiInternational

KWYHolding

PatriotCorp

SCIAInt

TridentScientific

ViaSatellite

IT DefenseCommunicationsDivision

Intelligence & Counterintelligence Support- operations- improve data gathering- secure information, networks,

X X X X X X X X

IT modernization andsustainment

- design, dev, deploys, modern, IT systems X X X X X X

Cybersecurity- identifying/neutr cyber attacks- manage security- networkattack/defense/eXploitation

X X X X X X X X X X X

DefenseSystemsEngineeringDivision

System and InfrastuctureDevelopment

- system engineering services- military hw and sw (air/sea/land)

X X X X X X

Test and Evaluation- test and eveluation X

Other ActivitiesWeap.,warfighter

Vehicles,EnergySystems

Vehicles,Weap.Jetaircraft

urbineengine,power units,infr. prot.

inteligenceproduct,Comm syst.

Missile syst, def combatsyst

sensors satelites

InternationalEXposure

96% of revenues from US1 office in the UK

US + int. US US US US US INTUS gov +allies

US depdef

US intagencies

US gov

X : potential operational match

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Bake-Off Inc Presentation